UBS Recommend Rolling Futures Exposure Early

UBS note that “despite the strong rally since mid-October, the UKT 0.625% Jul-35 bond remains the CTD in both the front and back gilt futures contracts, and hence there is no significant duration gap, as approximately 0.76% of March contracts would be required to clean up the tail.”

• “Furthermore, there is significant switch potential in both contracts.”
• “We cannot establish a meaningful positioning bias from recent open interest and price interactions.”
• “However, the recent decline in open interest and pick-up in futures prices may suggest that short positions are being closed out, while positioning seems to be more neutral. So far, less than 1% of the open interest is in the March contract, which is in line with the past rolls' history.”
• “On current net basis differentials, the December contract looks cheaper relative to its CTD compared to the March contract. However, we would recommend rolling early, given weak liquidity conditions and increased switching potential.”